Market update

Market update: tariffs and geopolitics choke markets

There’s a notable shift in market sentiment today, investors are in the grip of risk aversion. A shifting geopolitical landscape, the US no longer aligning with Europe, and tariffs are a toxic mix. Here are the five markets to watch on Tuesday.

1, The tech stock sell off: It’s a very uncomfortable time for growth investors, and tech investors, in particular. Tech stocks have traditionally performed well when growth is strong. As the outlook for global growth has darkened, tech stocks have fallen out of favour.

Nvidia’s share price fell 8% on Monday and is flat so far on Tuesday. This means that the AI giant is down 12% in the past week, even though its earnings report that was released last week was strong, and the company provided positive forward guidance. Nvidia produces the only chip that can power the AI revolution, but that is not enough for financial markets. Growth stocks and momentum are the biggest drags on the S&P 500 right now, and this could continue until animal spirits calm down.

Tariffs and geopolitical tensions are weighing on overall market risk, but does tech deserve to be targeted? At this stage, tariffs are unlikely to slow down the AI revolution, and US companies have pledged to spend $2 trillion on AI -related capex in the next 3-years, which is positive for AI related stocks. So, why are they selling off, and when will the sell off end? AI is a new technology that needs investors to have a degree of confidence to buy into, right now, that confidence is in short supply.

When confidence has been lost, it’s hard to know when it will come back. This is where technical analysis comes into play. The S&P 500 is close to breaking out of its post-election range and the Nasdaq 100, which is dominated by the 100 biggest US tech stocks, is approaching its 200-day moving average, which is a key support level. These key support levels could make investors pause for thought. Support levels can trigger a recovery rally and some buying interest, however a break below the 200-day sma in the Nasdaq, would be a very bearish development for this index.

2, Stock market rotation

There has been a number of stock market rotations this year: a move out of US stocks into European stocks, a move out of US stocks and into Asian stocks, as well as sectoral rotation, including into European defense stocks, which have soared in recent weeks.

The latest rotation is into typical bear market sectors like healthcare and consumer staples. Although European indices are broadly lower on Tuesday, not all sectors or indices are under as much downward pressure. For example, the FTSE 100 is the most resilient of the European indices today. Pharma giants GSK and Astra Zeneca are leading the index, along with Unilever and Reckitt Benckiser. In Europe, all but 5 members of the Eurostoxx 50 are lower today. Luxury stocks are getting sold off sharply, as disruption to global trade could have a major impact to this international sector.

Investors don’t like tariffs, and they are deeply uncomfortable with President Trump’s new world order, which is weighing om market sentiment. More tariffs are expected from the US in the coming weeks, including for the EU and reciprocal tariffs, which could keep investors on edge in the short term.

2, The gold price

The ultimate haven in this storm is gold. The yellow metal is higher by nearly $80 so far this week. Gold protects against the inflationary impact of tariffs , and it is a store of value. This asset was designed for tariff related risk aversion, and it is edging its way closer to the $3000 per ounce level.

4, Fed rate cuts

Sovereign bonds are also a harbour in the storm, as bond prices have risen, yields have fallen sharply. The 10-year US Treasury yield is lower by 16 bps in the past week, it is currently at 4.12%, with 4% the next obvious target. The sharp repricing of sovereign bonds, and the sharp drop in Treasury yields, is also a sign of panic. If the 10-year yield falls below 4%, this could further weigh on sentiment as it may lead to speculation about US economic health.

Could the ‘Fed put’ help to stabilize risky assets? There are a plethora of Fed speakers this week, but we doubt that they will directly step into markets to ease the selling pressure. For now, this is a market correction only. Earnings were strong last quarter and although tariff threats are real, less than half of the S&P 500 mentioned tariffs as a future threat on their Q4 earnings calls. However, as risk assets have plunged, the market has boosted expectations for Fed rate cuts. There are now 3 cuts priced in for 2025. If Fed speakers quash this optimism, the stock market sell off could have further to go.  However, if they wish to calm markets, then they could talk up the prospect of rate cuts to protect the US economy from a global trade war.

5, The dollar

The greenback looked like it would stage a meaningful rally last week, however, that has been cut short by the precipitous drop in US bond yields and the dollar is the weakest currency in the G10 FX space so far this week.

There is a chance that the current environment could trigger an existential crisis for the US currency. A global trade war could ultimately reduce the demand for dollars. The dollar is the world’s reserve currency for  now, but if Donald Trump continues his isolationist agenda, then who knows if the dollar will continue to be held in such high regard in the FX market.